MBHI Midwest Banc Hlds (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2009

Commission File Number: 001-13735

MIDWEST BANC HOLDINGS, INC.

(Exact name of Registrant as specified in its charter.)

Delaware (State or other jurisdiction of incorporation or organization)		36-3252484 (I.R.S. Employer Identification Number)
501 W. North Ave. Melrose Park, Illinois (Address of principal executive offices)		60160 (Zip code)

(708) 865-1053
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o  No  o

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at November 9, 2009
Common, par value $0.01		28,116,312

 

 

MIDWEST BANC HOLDINGS, INC.

Form 10-Q

Table of Contents

		Page Number
PART I
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			59
Item 4. Controls and Procedures			60
PART II
Item 1. Legal Proceedings			65
Item 1A. Risk Factors			65
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds			87
Item 3. Defaults upon Senior Securities			87
Item 4. Submission of Matters to a Vote of Security Holders			87
Item 5. Other Information			87
Item 6. Exhibits			87
Signature Page			88
EX-31.1
EX-31.2
EX-32.1

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except for share data)

		September 30,				December 31,
		2009				2008
ASSETS
Cash		$	32,278			$	61,330
Federal funds sold and other short-term investments			295,162				1,735
Total cash and cash equivalents			327,440				63,065
Securities available-for-sale (securities pledged to creditors:
$480,614 at September 30, 2009 and $482,224 at December 31, 2008)			615,543				621,949
Securities held-to-maturity (fair value: $30,387 at December 31, 2008)			—				30,267
Total securities			615,543				652,216
Federal Reserve Bank and Federal Home Loan Bank stock, at cost			27,652				31,698
Loans			2,454,101				2,509,759
Allowance for loan losses			(83,506	)			(44,432	)
Net loans			2,370,595				2,465,327
Cash surrender value of life insurance			—				84,675
Premises and equipment, net			40,589				38,313
Foreclosed properties			20,980				12,018
Core deposit and other intangibles, net			12,964				14,683
Goodwill			78,862				78,862
Other assets			49,505				129,355
Total assets		$	3,544,130			$	3,570,212
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest-bearing		$	330,901			$	334,495
Interest-bearing			2,224,288				2,078,296
Total deposits			2,555,189				2,412,791
Revolving note payable			8,600				8,600
Securities sold under agreements to repurchase			297,650				297,650
Advances from the Federal Home Loan Bank			340,000				380,000
Junior subordinated debentures			60,828				60,791
Subordinated debt			15,000				15,000
Term note payable			55,000				55,000
Total borrowings			777,078				817,041
Other liabilities			31,624				34,546
Total liabilities			3,363,891				3,264,378
Commitments and contingencies (see note 9)
Stockholders’ Equity
Preferred stock, $0.01 par value, 1,000,000 shares authorized; Series A, $2,500 liquidation preference, 17,250 shares issued and outstanding at September 30, 2009 and December 31, 2008; Series T, $1,000 liquidation preference, 84,784 shares issued and outstanding at September 30, 2009 and December 31, 2008			1				1
Common stock, $0.01 par value, 64,000,000 shares authorized; 29,847,092 shares issued and 28,116,312 outstanding at September 30, 2009 and 29,530,878 shares issued and 27,892,578 outstanding at December 31, 2008			301				296
Additional paid-in capital			385,219				383,491
Warrant			5,229				5,229
Accumulated deficit			(191,726	)			(66,325	)
Accumulated other comprehensive loss			(4,032	)			(2,122	)
Treasury stock, at cost (1,730,780 shares at September 30, 2009 and 1,638,300 shares at December 31, 2008)			(14,753	)			(14,736	)
Total stockholders’ equity			180,239				305,834
Total liabilities and stockholders’ equity		$	3,544,130			$	3,570,212

See accompanying notes to unaudited consolidated financial statements.

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Interest Income
Loans		$	33,294			$	37,364			$	103,191			$	115,562
Securities
Taxable			1,488				7,739				13,091				25,776
Exempt from federal income taxes			29				574				985				1,765
Dividends from Federal Reserve and Federal Home Loan Bank stock			160				184				520				551
Federal funds sold and other short-term investments			164				27				276				273
Total interest income			35,135				45,888				118,063				143,927
Interest Expense
Deposits			11,385				15,301				37,280				50,501
Federal funds purchased and FRB discount window advances			—				563				49				2,050
Revolving note payable			158				96				289				270
Securities sold under agreements to repurchase			3,264				3,338				9,698				9,998
Advances from the Federal Home Loan Bank			3,065				2,779				9,129				8,698
Junior subordinated debentures			497				864				1,851				2,785
Subordinated debt			145				229				441				464
Term note payable			679				565				1,227				2,027
Total interest expense			19,193				23,735				59,964				76,793
Net interest income			15,942				22,153				58,099				67,134
Provision for credit losses			37,450				42,200				71,453				52,367
Net interest income after provision for credit losses			(21,508	)			(20,047	)			(13,354	)			14,767
Noninterest Income
Service charges on deposit accounts			2,013				1,918				5,860				5,834
Net gains (losses) on securities transactions			386				(16,652	)			4,637				(16,596	)
Impairment loss on securities			—				(47,801	)			(740	)			(65,387	)
Losses on sales of loans			—				(75	)			—				(75	)
Insurance and brokerage commissions			268				448				926				1,691
Trust fees			337				451				915				1,382
Increase in cash surrender value of life insurance			—				911				1,332				2,634
Gain on sale of property			—				—				—				15,196
Other			653				288				1,365				993
Total noninterest income (loss)			3,657				(60,512	)			14,295				(54,328	)
Noninterest Expense
Salaries and employee benefits			8,948				12,515				31,890				36,570
Occupancy and equipment			3,175				3,211				9,776				9,203
Professional services			2,838				2,016				6,830				5,350
Loss on early extinguishment of debt			—				—				—				7,121
Marketing			201				575				1,228				1,864
Foreclosed properties			3,098				24				3,893				266
Amortization of intangible assets			573				590				1,719				1,771
Merger related			—				77				—				271
Goodwill impairment			—				80,000				—				80,000
FDIC insurance			1,550				1,465				5,986				2,099
Other			2,067				2,573				7,056				7,156
Total noninterest expense			22,450				103,046				68,378				151,671
Loss before income taxes			(40,301	)			(183,605	)			(67,437	)			(191,232	)
Provision (benefit) for income taxes			966				(23,891	)			55,617				(28,530	)
Net loss			(41,267	)			(159,714	)			(123,054	)			(162,702	)
Preferred stock dividends and premium accretion			1,289				835				4,702				2,506
Income allocated to participating securities			—				—				—				—
Net loss available to common stockholders		$	(42,556	)		$	(160,549	)		$	(127,756	)		$	(165,208	)
Basic earnings per share		$	(1.52	)		$	(5.76	)		$	(4.57	)		$	(5.93	)
Diluted earnings per share		$	(1.52	)		$	(5.76	)		$	(4.57	)		$	(5.93	)
Cash dividends declared per common share		$	—			$	—			$	—			$	0.26

See accompanying notes to unaudited consolidated financial statements.

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
For the Nine Months Ended September 30, 2009 and 2008

(In thousands, except share and per share data)

																		Retained				Accumulated
										Additional								Earnings				Other								Total
		Preferred				Common				Paid in								(Accumulated				Comprehensive				Treasury				Stockholders’
		Stock				Stock				Capital				Warrant				Deficit)				Loss				Stock				Equity
Balance, December 31, 2007		$	—			$	293			$	300,762			$	—			$	102,762			$	(13,917	)		$	(14,736	)		$	375,164
Cash dividends declared ($145.3125 per share) on Series A preferred stock			—				—				—				—				(2,506	)			—				—				(2,506	)
Cash dividends declared ($0.26 per share) on common stock			—				—				—				—				(7,404	)			—				—				(7,404	)
Issuance of common stock upon exercise of 16,500 stock options, net of tax benefit			—				—				178				—				—				—				—				178
Issuance of 226,324 shares restricted stock			—				2				(2	)			—				—				—				—				—
Stock-based compensation expense			—				—				2,283				—				—				—				—				2,283
Comprehensive loss
Net loss			—				—				—				—				(162,702	)			—				—				(162,702	)
Prior service cost, net of income taxes			—				—				—				—				—				(449	)			—				(449	)
Net increase in fair value of securities classified as available- for-sale, net of income taxes and reclassification adjustments			—				—				—				—				—				2,673				—				2,673
Total comprehensive loss																															(160,478	)
Balance, September 30, 2008		$	—			$	295			$	303,221			$	—			$	(69,850	)		$	(11,693	)		$	(14,736	)		$	207,237
Balance, December 31, 2008		$	1			$	296			$	383,491			$	5,229			$	(66,325	)		$	(2,122	)		$	(14,736	)		$	305,834
Cash dividends declared ($48.4375 per share) on Series A preferred stock			—				—				—				—				(836	)			—				—				(836	)
Cash dividends declared ($9.72 per share) on Series T preferred stock			—				—				—				—				(824	)			—				—				(824	)
Issuance of 19,965 shares of common stock to employee stock purchase plan			—				—				14				—				—				—				—				14
Issuance of 166,568 shares of common stock to directors’ deferred compensation plan			—				2				113				—				—				—				—				115
Issuance of 334,882 shares of restricted stock			—				3				(3	)			—				—				—				—				—
Accreted discount on Series T preferred stock			—				—				687				—				(687	)			—				—				—
Stock-based compensation expense			—				—				917				—				—				—				—				917
Repurchase of 10,695 shares of common stock under benefit plan			—				—				—				—				—				—				(17	)			(17	)
Comprehensive loss
Net loss			—				—				—				—				(123,054	)			—				—				(123,054	)
Prior service cost including income taxes adjustment			—				—				—				—				—				(201	)			—				(201	)
Income taxes adjustment on decrease in value of projected benefit obligation			—				—				—				—				—				(151	)			—				(151	)
Net decrease in fair value of securities classified as available- for-sale including income taxes adjustment			—				—				—				—				—				(1,558	)			—				(1,558	)
Total comprehensive loss																															(124,964	)
Balance, September 30, 2009		$	1			$	301			$	385,219			$	5,229			$	(191,726	)		$	(4,032	)		$	(14,753	)		$	180,239

See accompanying notes to unaudited consolidated financial statements.

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2009 and 2008
(In thousands)

		2009				2008
Cash flows from operating activities
Net loss		$	(123,054	)		$	(162,702	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation			3,096				3,107
Provision for loan losses			69,700				51,765
Amortization of core deposit and other intangibles			1,115				630
Goodwill impairment charge			—				80,000
Amortization of premiums and discounts on securities, net			389				431
Realized (gain) loss on sale of securities, net			(4,637	)			16,596
Impairment loss on securities			740				65,387
Net loss on sales of loans			—				75
Gain on sale of property			—				(15,196	)
Loss on early extinguishment of debt			—				7,121
Increase in cash surrender value of life insurance			(1,332	)			(2,634	)
Deferred income taxes			48,706				(14,259	)
Loss on disposition of foreclosed properties, net			178				222
Valuation loss on foreclosed properties			2,569				—
Amortization of deferred stock based compensation			917				2,283
Change in other assets			29,517				(16,774	)
Change in other liabilities			(2,471	)			(436	)
Net cash provided by operating activities			25,433				15,616
Cash flows from investing activities
Sales of securities available-for-sale			573,741				108,770
Sales of securities held-to-maturity			27,856				4,443
Redemption of Federal Reserve Bank and Federal Home Loan Bank stock			4,046				1,000
Maturities of securities available-for-sale			1,007,865				107,585
Principal payments on securities available-for-sale			49,537				42,496
Principal payments on securities held-to-maturity			2,468				2,430
Purchases of securities available-for-sale			(1,621,933	)			(244,043	)
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock			—				(4,535	)
Loan originations and principal collections, net			11,698				(68,969	)
Sale of mortgage loans			—				5,789
Proceeds from sale of property			—				18,259
Proceeds from disposition of foreclosed properties			1,989				244
Liquidation of bank-owned life insurance			86,008				—
Additions to property and equipment			(5,372	)			(2,694	)
Net cash provided by (used in) investing activities			137,903				(29,225	)
Cash flows from financing activities
Net increase in deposits			142,587				55,185
Proceeds from borrowings			—				234,600
Repayments on borrowings			(40,000	)			(167,075	)
Preferred cash dividends paid			(1,660	)			(2,506	)
Common cash dividends paid			—				(11,076	)
Change in federal funds purchased, FRB discount window advances, and securities sold under agreements to repurchase			—				(66,750	)
Repurchase of common stock under stock and incentive plan			(17	)			—
Proceeds from issuance of common under stock and incentive plan			129				175
Net cash provided by financing activities			101,039				42,553
Increase (decrease) in cash and cash equivalents			264,375				28,944
Cash and cash equivalents at beginning of period			63,065				84,499
Cash and cash equivalents at end of period		$	327,440			$	113,443
Supplemental disclosures
Cash paid during period for:
Interest		$	61,237			$	78,685
Income taxes			1,842				2,700

See accompanying notes to unaudited consolidated financial statements.

MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION

     The consolidated financial statements of Midwest Banc Holdings, Inc. (the “Company”) included herein are unaudited; however, such statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation for the interim periods. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

     The annualized results of operations for the nine months ended September 30, 2009 are not necessarily indicative of the results expected for the full year ending December 31, 2009. Certain items in the prior year financial statements were reclassified to conform to the current year’s presentation. Such reclassifications had no effect on net income.

NOTE 2 — FORBEARANCE AGREEMENT

     The Company’s credit agreements with a correspondent bank at September 30, 2009 included a revolving line of credit and term note. The Company was in violation of the financial covenants contained in the revolving line of credit and term note. The Company also did not make a required principal payment on the term note due on July 1, 2009 and did not pay all of the aggregate outstanding principal on the revolving line of credit that matured July 3, 2009. On July 8, 2009, the lender advised the Company that the non-compliance and failure to make the principal payments constitute events of default. See Note 15 — Credit Agreements.

     On October 22, 2009, the Company entered into a forbearance agreement (“Forbearance Agreement”) with its lender that provides for a forbearance period through March 31, 2010, during which time the Company will continue to pursue completion of its previously disclosed capital plan. Management believes that the Forbearance Agreement provides the Company sufficient time to complete all major elements of the capital plan; however there can be no assurance that any or all major elements of the capital plan will be completed in a timely manner or at all. During the forbearance period, the Company is not obligated to make interest and principal payments in excess of funds held in a deposit security account (which will be funded with $325,000), and while retaining all rights and remedies under the credit agreements, the lender has agreed not to demand payment of amounts due or begin foreclosure proceedings in respect of the collateral, which consists primarily of all the stock of the Company’s principal subsidiary, Midwest Bank and Trust Company, and has agreed to forbear from exercising the rights and remedies available to it in respect of existing defaults and future compliance with certain covenants through March 31, 2010. As part of the Forbearance Agreement, the Company entered into a tax refund security agreement under which it agreed to deliver to the lender the expected proceeds to be received in connection with an outstanding Federal income tax refund in the approximate amount of $2.1 million. These proceeds, when received, will be placed in the deposit security account, and will be available for interest and principal payments. The Forbearance Agreement may terminate prior to March 31, 2010 if the Company defaults under any of its representations, warranties or obligations contained in either the Forbearance Agreement or credit agreements, or the Bank becomes subject to receivership by the FDIC or the Company becomes subject to other bankruptcy or insolvency type proceeding.

     Upon the expiration of the forbearance period, the principal and interest payments that were due under the revolving line of credit and the term note, as modified by the covenant waivers, at the time the Forbearance Agreement was entered into will once again become due and payable, along with such other amounts as may have become due during the forbearance period. Absent successful completion of all or a significant portion of the Capital Plan, the Company expects that it would not be able to meet any demands for payment of amounts then due at the expiration of the forbearance period. If the Company is unable to renegotiate, renew, replace or expand its sources of financing on acceptable terms, it may have a material adverse effect on the Company’s business and results of operations.

MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 3 — REGULATORY ACTIONS

     The Bank’s primary regulators, the Federal Reserve Bank of Chicago and the Illinois Department of Financial and Professional Regulation, Division of Banking, have recently completed a safety and soundness examination of the Bank. As a result of that examination, the Company expects that the Federal Reserve Bank and the Division of Banking will request that the Bank enter into a formal supervisory action requiring it to take certain steps intended to improve its overall condition. Such a supervisory action could require the Bank, among other things, to: implement the previously disclosed capital plan to strengthen the Bank’s capital position; develop a plan to improve the quality of the Bank’s loan portfolio by charging off loans and reducing its position in assets classified as “substandard;” develop and implement a plan to enhance the Bank’s liquidity position; and enhance the Bank’s loan underwriting and workout remediation teams. The final supervisory action may contain other conditions and targeted time frames as specified by the regulators.

     The Company believes that the successful completion of all or a significant portion of the Capital Plan will enable the Bank to meet the requirements of any formal supervisory action with the regulators and will ensure that the Bank is able to comply with applicable bank regulations. However, the successful completion of all or any portion of the capital plan is not assured and if the Company or the Bank is unable to comply with the terms of the anticipated supervisory action or any other applicable regulations, the Company and the Bank could become subject to additional, heightened supervisory actions and orders. If our regulators were to take such additional actions, the Company and the Bank could become subject to various requirements limiting the ability to develop new business lines, mandating additional capital, and/or requiring the sale of certain assets and liabilities. Failure of the Company to meet these conditions could lead to further enforcement action on behalf of the regulators. The terms of any such additional regulatory actions, orders or agreements could have a materially adverse effect on the business of the Bank and the Company.

NOTE 4 — NEW ACCOUNTING PRONOUNCEMENTS

     The Financial Accounting Standards Board (“FASB”) has established the FASB Accounting Standards Codification ^TM (“Codification” or “ASC”) as the single source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities (ASC 105). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. Following the Codification, the Board will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”), which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.

     GAAP is not intended to be changed as a result of the FASB’s Codification project, but it will change the way the guidance is organized and presented. As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in their accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has implemented the Codification in this quarterly report by providing references to the Codification topics.

MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     In December 2007, the FASB revised the authoritative guidance for business combinations (ASC 805), which modifies the accounting for business combinations and requires, with limited exceptions, the acquirer in a business combination to recognize all of the assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree at the acquisition-date, at fair value. This guidance also requires certain contingent assets and liabilities acquired as well as contingent consideration to be recognized at fair value. In addition, this guidance requires payments to third parties for consulting, legal, audit, and similar services associated with an acquisition to be recognized as expenses when incurred rather than capitalized as part of the cost of the acquisition. This guidance is effective for fiscal years beginning on or after December 15, 2008 and early adoption is not permitted. The adoption of this guidance on January 1, 2009 did not have a material effect on the Company’s results of operations or consolidated financial position.

     In June 2008, the FASB provided guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock (ASC 815-40-15). This guidance applies to any freestanding financial instrument or embedded feature that has all of the characteristics of a derivative or freestanding instrument that is potentially settled in an entity’s own stock (with the exception of share-based payment awards within the scope of the authoritative guidance for stock compensation (ASC 718)). To meet the definition of “indexed to own stock,” an instrument’s contingent exercise provisions must not be based on (a) an observable market, other than the market for the issuer’s stock (if applicable), or (b) an observable index, other than an index calculated or measured solely by reference to the issuer’s own operations, and the variables that could affect the settlement amount must be inputs to the fair value of a “fixed-for-fixed” forward or option on equity shares. This guidance is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2009 did not have a material effect on the Company’s results of operations or consolidated financial position.

     On June 16, 2008, the FASB issued authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities (ASC 260). This guidance addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Accordingly, the Company adopted the provisions of this guidance effective January 1, 2009 and computed earnings per share using the two-class method for all periods presented. Upon adoption, the Company retrospectively adjusted earnings per share data to conform to the provisions in this guidance.

     In December 2008, the FASB amended the authoritative guidance regarding disclosures by public entities about transfers of financial assets (ASC 860) and interests in variable interest entities (ASC 810), which requires additional disclosures about transfers of financial assets and the involvement with variable interest entities. These additional disclosures are intended to provide greater transparency about a transferor’s continuing involvement with transferred assets and variable interest entities. This guidance is effective for fiscal years ending after December 15, 2008. The adoption of this guidance on January 1, 2009 did not have a material effect on the Company’s results of operations or consolidated financial position.

MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     On April 9, 2009, the FASB amended the authoritative guidance for fair value measurements and disclosures (ASC 820), which requires increased analysis and management judgment to estimate fair value if an entity determines that either the volume and/or level of activity for an asset or liability has significantly decreased or price quotations or observable inputs are not associated with orderly transactions. Valuation techniques such as an income approach might be appropriate to supplement or replace a market approach in those circumstances. This guidance requires entities to disclose in interim and annual periods the inputs and valuation techniques used to measure fair value along with any changes in valuation techniques and related inputs during the period. This guidance is effective for interim and annual periods ending after June 15, 2009. Accordingly, the Company included these new disclosures beginning April 1, 2009. See Note 10 — Fair Value for more information.

     On April 9, 2009, the FASB amended the authoritative guidance for interim disclosures about fair value of financial instruments (ASC 825), which relates to fair value disclosures in public entity financial statements for financial instruments. This guidance increases the frequency of fair value disclosures from annual only to quarterly. This guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on the Company’s results of operations or consolidated financial position, but enhanced required disclosures. Accordingly, the Company included these new disclosures beginning April 1, 2009. See Note 10 — Fair Value for more information.

     On April 9, 2009, the FASB issued new authoritative guidance that revises the recognition and reporting requirements for other-than-temporary impairments of debt securities (ASC 320). This guidance eliminates the “ability and intent to hold” provision for debt securities and impairment is considered to be other than temporary if a company (i) intends to sell the security, (ii) more likely than not will be required to sell the security before recovering its cost, or (iii) does not expect to recover the security’s entire amortized cost. This guidance also eliminates the “probability” standard relating to the collectibility of cash flows and impairment is considered to be other than temporary if the present value of cash flows expected to be collected is less than the amortized cost (credit loss). Other-than-temporary losses also need to be separated between the amount related to credit loss (which is recognized in current earnings) and the amount related to all other factors (which is recognized in other comprehensive income). This guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance on April 1, 2009 did not have a material effect on the Company’s results of operations or consolidated financial position.

     In May 2009, the FASB issued authoritative guidance establishing principles and requirements for subsequent events (ASC 855). This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance is based on the same principles as those that currently exist in the auditing standards. An entity must disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or available to be issued. This guidance also requires disclosure of subsequent events to keep the financial statements from being misleading. This guidance is effective for interim or annual periods ending after June 15, 2009. The adoption of this guidance on June 30, 2009 did not have a material effect on the Company’s results of operations or consolidated financial position.

     In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140.” This guidance eliminates the concept of a qualifying special-purpose entity, introduces the concept of a “participating interest,” which will limit the circumstances where the transfer of a portion of a financial asset will qualify as a sale, assuming all other derecognition criteria are met, it clarifies and amends the derecognition criteria for determining whether a transfer qualifies for sale accounting, and requires additional disclosures. The Company does not believe that the adoption of SFAS No. 166 on January 1, 2010 will have a material effect on the Company’s results of operations or consolidated financial position. This authoritative guidance has not yet been incorporated within the FASB’s Codification.

MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity. If an enterprise is required to consolidate an entity as a result of the initial application of this standard, it should describe the transition method(s) applied and shall disclose the amount and classification in its statement of financial position of the consolidated assets or liabilities by the transition method(s) applied. If an enterprise is required to deconsolidate an entity as a result of the initial application of this standard, it should disclose the amount of any cumulative effect adjustment related to deconsolidation separately from any cumulative effect adjustment related to consolidation of entities. The Company does not believe that the adoption of SFAS No. 167 on January 1, 2010 will have a material effect on the Company’s results of operations or consolidated financial position. This authoritative guidance has not yet been incorporated within the FASB’s Codification.

NOTE 5 — SECURITIES

     The amortized cost and fair value of securities available-for-sale and held-to-maturity are as follows:

		September 30, 2009
						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
Securities available-for-sale
Obligations of U.S. Treasury		$	451,785			$	8			$	(1	)		$	451,792
Obligations of states and political subdivisions			212				5				—				217
Mortgage-backed securities:
U.S. government agencies — residential (1)			147,043				513				(553	)			147,003
U.S. government-sponsored entities — residential (2)			1,783				13				—				1,796
Equity securities of U.S. government-sponsored entities (3)			2,749				1,270				(148	)			3,871
Corporate and other debt securities			14,979				—				(4,115	)			10,864
Total securities available-for-sale		$	618,551			$	1,809			$	(4,817	)		$	615,543
Total securities held-to-maturity		$	—			$	—			$	—			$	—

MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		December 31, 2008
						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
Securities available-for-sale
Obligations of U.S. Treasury and U.S. government-sponsored entities (1)		$	263,483			$	1,952			$	—			$	265,435
Obligations of states and political subdivisions			57,309				241				(886	)			56,664
Mortgage-backed securities (1)(2)			281,592				3,363				(1,276	)			283,679
Equity securities (3)			2,749				—				(1,819	)			930
Corporate and other debt securities			19,176				—				(3,935	)			15,241
Total securities available-for-sale		$	624,309			$	5,556			$	(7,916	)		$	621,949
Securities held-to-maturity
Obligations of states and political subdivisions		$	1,251			$	12			$	—			$	1,263
Mortgage-backed securities (1)(2)			29,016				138				(30	)			29,124
Total securities held-to-maturity		$	30,267			$	150			$	(30	)		$	30,387

     During the second quarter of 2009, the Company repositioned its securities portfolio to lower capital requirements associated with higher risk-weighted assets, restructure expected cash flows, reduce credit risk, and enhance the Bank’s asset sensitivity. The Company sold $538.1 million of its securities portfolio with an average yield of 3.94% and average life of slightly over two years, including $27.7 million of securities classified as held-to-maturity. The securities sold consisted of U.S. government-sponsored entities debentures, mortgage-backed securities, and municipal bonds. These securities were sold in the open market at a net gain of $4.3 million; $117,000 of this gain was related to securities classified as held-to-maturity. The Company purchased $571.0 million of U.S. Treasury bills and Government National Mortgage Association mortgage-backed securities. The average yield on these securities is 0.43% with an average life of less than six months.

     As of June 30, 2009, the Company still held $27.6 million in five securities, including municipal bonds and U.S. government-sponsored entities mortgage-backed securities, that were identified for sale under this portfolio repositioning program. Consistent with that program and the Company’s stated intent to sell these securities, the Company recognized a $740,000 other-than-temporary impairment charge on June 30, 2009. As of September 30, 2009, the Company continued to hold two of the five securities with balances totaling $2.0 million, which included a municipal bond and a mortgage-backed security of a U.S. government-sponsored entity that were identified for sale under this portfolio repositioning program, which were not impaired as of that date.

MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

          The following is a summary of the fair value of securities held-to-maturity and available-for-sale with unrealized losses and an aging of those unrealized losses:

		September 30, 2009
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Securities available-for-sale:
Obligations of U.S. Treasury		$	49,997			$	(1	)		$	—			$	—			$	49,997			$	(1	)
Mortgage-backed securities:
U.S. government agencies — residential (1)			51,656				(553	)			—				—				51,656				(553	)
Equity securities of U.S. government-sponsored entities (2)			831				(148	)			—				—				831				(148	)
Corporate and other debt securities			—				—				10,864				(4,115	)			10,864				(4,115	)
Total securities available-for-sale			102,484				(702	)			10,864				(4,115	)			113,348				(4,817	)
Total temporarily impaired securities		$	102,484			$	(702	)		$	10,864			$	(4,115	)		$	113,348			$	(4,817	)

										December 31, 2008
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Securities available-for-sale
Obligations of states and political subdivisions		$	34,293			$	(886	)		$	—			$	—			$	34,293			$	(886	)
Mortgage-backed securities U.S. government-sponsored entities(1)			60,117				(198	)			39,778				(1,078	)			99,895				(1,276	)
Equity securities of U.S. government-sponsored entities (2)			899				(1,819	)			—				—				899				(1,819	)
Corporate and other debt securities			3,746				(287	)			11,495				(3,648	)			15,241				(3,935	)
Total securities available-for-sale			99,055				(3,190	)			51,273				(4,726	)			150,328				(7,916	)
Securities held-to-maturity
Obligations of states and political subdivisions			250				—				—				—				250				—
Mortgage-backed securities U.S. government-sponsored entities(1)			—				—				20,521				(30	)			20,521				(30	)
Total securities held-to-maturity			250				—				20,521				(30	)			20,771				(30	)
Total temporarily impaired securities		$	99,305			$	(3,190	)		$	71,794			$	(4,756	)		$	171,099			$	(7,946	)

          The unrealized loss on available-for-sale securities is included in other comprehensive loss on the consolidated balance sheets. Management has concluded that no individual unrealized loss as of September 30, 2009, identified in the preceding table, represents other-than-temporary impairment. The Company does not intend to sell nor would it be required to sell the securities shown in the table with unrealized losses before recovering their amortized cost.

MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 6 — LOANS

          Major classifications of loans (source of repayment basis) are summarized as follows:

		September 30,								December 31,
		2009								2008
						% of Gross								% of Gross
		Amount				Loans				Amount				Loans
		(Dollars in thousands)
Commercial		$	1,045,533				42.6	%		$	1,090,078				43.3	%
Construction			324,074				13.2				366,178				14.6
Commercial real estate			744,464				30.3				729,729				29.1
Home equity			227,966				9.3				194,673				7.8
Other consumer			5,583				0.2				6,332				0.3
Residential mortgage			107,124				4.4				123,161				4.9
Total loans, gross			2,454,744				100.0	%			2,510,151				100.0	%
Net deferred fees			(643	)							(392	)
Total loans, net		$	2,454,101							$	2,509,759

NOTE 7 — ALLOWANCE FOR LOAN LOSSES

          Following is a summary of activity in the allowance for loan losses:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands)
Balance, at beginning of period		$	63,893			$	22,606			$	44,432			$	26,748
Provision charged to operations			36,700				41,950				69,700				51,765
Loans charged off			(17,723	)			(25,224	)			(32,268	)			(40,472	)
Recoveries			636				96				1,642				1,387
Net loans charged off			(17,087	)			(25,128	)			(30,626	)			(39,085	)
Balance, at end of period		$	83,506			$	39,428			$	83,506			$	39,428

          The provision for credit losses reflected on the consolidated statements of operations includes the provision for loan losses and the provision for unfunded commitment losses as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(In thousands)
Provision for loan losses		$	36,700			$	41,950			$	69,700			$	51,765
Provision for unfunded commitment losses			750				250				1,753				602
Provision for credit losses		$	37,450			$	42,200			$	71,453			$	52,367

          A portion of the allowance for loan losses is allocated to impaired loans. Information with respect to impaired loans and the amount of the allowance for loan losses allocated thereto is as follows:

		September 30, 2009
		(In thousands)
Impaired loans for which no allowance for loan losses is allocated		$	52,519
Impaired loans with an allocation of the allowance for loan losses			139,141
Total impaired loans		$	191,660
Allowance for loan losses allocated to impaired loans		$	38,779

		Nine Months Ended
		September 30, 2009
Average impaired loans		$	103,051
Interest income recognized on impaired loans on a cash basis			443

MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 8 — GOODWILL AND INTANGIBLES

          The following table presents the carrying amount and accumulated amortization of intangible assets (in thousands):

		September 30, 2009												December 31, 2008
		Gross Carrying				Accumulated				Net Carrying				Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Amortized intangible assets:
Core deposit and other intangibles		$	21,091			$	(8,127	)		$	12,964			$	21,091			$	(6,408	)		$	14,683

     The amortization of intangible assets was $573,000 and $1.7 million for the three and nine months ended September 30, 2009, respectively. At September 30, 2009, the projected amortization of intangible assets for the years ending December 31, 2009 through 2013 and thereafter is as follows (in thousands):

2009		$	2,292
2010			2,222
2011			1,918
2012			1,803
2013			1,696
Thereafter			4,752

The weighted average remaining amortization period for the core deposit intangibles is approximately seven years as of September 30, 2009.

          The following table presents the changes in the carrying amount of goodwill and other intangibles during the nine months ended September 30, 2009 (in thousands):

						Core Deposit
						and Other
		Goodwill				Intangibles
Balance at beginning of period		$	78,862			$	14,683
Amortization			—				(1,719	)
Balance at end of period		$	78,862			$	12,964

          Consistent with established policy, an annual review for goodwill impairment as of September 30, 2009 was conducted with the assistance of a nationally recognized third party valuation specialist. Based upon that review, the Company determined that the $78.9 million goodwill recorded on the September 30, 2009 balance sheet was not impaired.

MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 9 — OFF-BALANCE-SHEET RISK

          The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet financing needs of customers. Since many commitments to extend credit expire without being used, the amounts below do not necessarily represent future cash commitments. These financial instruments include lines of credit, letters of credit, and commitments to extend credit. These are summarized as follows as of September 30, 2009:

		Amount of Commitment Expiration Per Period
		Within												After
		1 Year				1-3 Years				4-5 Years				5 Years				Total
		(In thousands)
Lines of Credit:
Commercial real estate		$	81,610			$	5,632			$	5,238			$	—			$	92,480
Home equity			31,528				23,031				27,983				31,051				113,593
Consumer			—				—				—				1,986				1,986
Commercial			207,627				3,016				2,655				4,740				218,038
Letters of credit			43,836				3,220				2,828				—				49,884
Commitments to extend credit			12,922				—				—				—				12,922
Total commitments		$	377,523			$	34,899			$	38,704			$	37,777			$	488,903